Archives for posts with tag: capacity

In many instances the shipping industry is all about growth, with trade volumes expanding along with the world economy and fleet capacity growing too. However, that’s not exclusively the case. Today, trade volumes in some commodities are stalling, and there are some parts of the fleet that are on the wane. What might a look at some of those shrinking sectors tell us?

Frozen Out?

There are a number of reasons that can drive fleets into decline. The first is technological substitution by another sector. The reefer fleet is a good example. Total reefer fleet capacity has been in decline since the mid-1990s as containerized transportation has encroached onto the territory once held by conventional reefers. In 2012 reefer capacity in cubic feet declined by 12%, and last year by 0.6%.

Upsized?

Upsizing is another driver that can cause capacity in certain sectors to decline. As larger vessels offer greater real (or perceived) economies of scale, smaller vessel sectors can get left behind. This has been most noticeable in the containership sector. The sub-1,000 TEU boxship sector, once home to the classic ‘feeders’, has been in decline in TEU capacity terms since 2009, with growth in the boxship sector as a whole focussed on much larger vessels.

All Change?

Another driver of decline in a fleet segment can be a specific development in infrastructure. The Panamax containership fleet is an example of this. Although there are 838 Panamaxes still on the water, Panamax fleet capacity, which once accounted for more than 30% of the containership fleet, has been in decline since 2013, and there are no units on order. The planned expansion of the Panama Canal has made the Panamaxes yesterday’s vessels, and when the new locks eventually open (currently slated for later this year) the prospects for decline look even more certain. 11 Panamaxes have been sold for recycling already in 2016.

Cycling Through?

Market cycles can also explain shrinking fleets, although in this case the trends may not necessarily be lasting. In the Ro-Ro sector, with markets softer, total lane metre capacity was in decline for most of 2010-14. When markets are weak there is often limited vessel replacement with earnings insufficient to tempt owners at prevailing newbuild prices. Eventually the cycle turns, and earnings improve, incentivising owners to order new tonnage leading to fleet growth once again.

What Goes Down, Must Go Up?

Happily, however, each of these drivers also explain fleet expansion, generally with other sectors benefiting from the same trends in technology, upsizing or infrastructure. World fleet growth has slowed but remains positive, although even here it’s worth noting the patterns; growth has been more focussed on tonnage than ship numbers. Nevertheless, the global fleet is a broad church, and not everything is growing all of the time. The interesting news, however, is that if there’s growth overall, and one part is in decline, then another part must be growing even more quickly! Have a nice day.

SIW

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SIW1094This page recently took a look at surplus in the bulkcarrier sector, and how it was impacted by the ‘right’ speed for the market environment. In the containership sector, there also remains a significant level of surplus capacity, and here, if anything, speed is playing an even more critical role.

Surplus Capacity

In 2009 container trade experienced its first real major downturn, dropping by 9%. This created a huge surplus of capacity in a short period of time, which the containership sector has been struggling with ever since. The graph shows an estimate for the size of the ‘surplus’, calculated by assuming the vessel productivity at levels around those of 2000 when the market appeared to be close to equilibrium. At those speeds, the surplus by end 2009 appeared to reach about 2.6 million TEU of capacity (17% of all container capable capacity). This compares to a deficit of just 0.5m TEU in 2005 which drove record charter market levels.

Idle Hands

So, the liner companies who operate the container services were left with a mighty headache. Their immediate response was to ‘idle’ as much capacity as possible in an attempt to prop up the market balance and support freight rates. By end 2009 1.5m TEU was idled though this figure has since dropped. This eventually helped the liners but did no favours to the charter owners who found it impossible to bid vessel charter rates back up with a huge pool of laid up capacity free for charterers to choose from.

Speedy Remedy

But perhaps the more durable response has been slow steaming. At the speeds many containerships were operating before the downturn (some running as fast as 24 knots), this was an obvious move. Liner companies quickly added extra ships to services whilst dropping speeds. This maintained service schedules, but also absorbed capacity and reduced overall costs through lower bunker expenditures. By end 2012, calculations suggest that 1.6m TEU was being absorbed by slow steaming.

How Much Left?

With idling and slow steaming in play, the surplus is much reduced. A projected end 2013 surplus of 3.0m TEU drops to a ‘current’ surplus of 0.7m TEU when allowances are made for 1.9m TEU now absorbed by slow steaming and the 0.4m TEU still idle. Of course, if the services sped up again, that would release lots of capacity but the key determining factor for containership speeds is today’s high fuel price environment, and the previously high speeds continue to make no sense to operators.

So, the remaining surplus plus idle capacity is 1.1m TEU, and that’s about a third of its potential level at pre-recession speeds. That’s the good news. The bad news is that trade still has some way to go to outperform supply by enough to close the gap. We still need the world’s consumers to generate demand for more containerised cargo. Have a nice day, and don’t forget your shopping!